Dennis' Mortgage Blog

Question of the week:  I see and hear a lot of advertising encouraging me to get an Adjustable Rate Mortgage, I thought those we part of the problem with the housing crisis.  Thoughts?

Answer:   Great question because we, the mortgage originator, are also getting a lot of solicitations from lenders to use ARMs a mortgage products for our clients.  The ARMs being talked about today are not necessarily the ones being pushed four, five, six years ago.  Most of the push then was for “Option ARMs” that adjust monthly.  Today the push is for what are known as “Hybrid ARMs” that have a period of a fixed rate, three, five, seven or ten years, before adjusting annually. 

Looking back, most homeowners with ARMs have been benefiting from the interest rate markets the past few years as short term rates have dropped considerably.  Many, most?, borrowers in hybrid ARMs are seeing their interest rates drop when the loan converts from the fixed rate period to the adjustable because the index upon which the loan is based is around 1% or lower.  Obviously these low rates will not continue forever so now is a good time to take advantage of the very low rate and accelerate principle reduction so as rates do rise the impact on your payment is less.

Looking forward as to whether obtain an ARM is a good idea or not, the answer is the same today as it was in 2000 or 2003 or 2006: it depends.  (Reader: Dennis this is a cop-out answer.  Dennis: Read on)

What are your objectives?  Are you  planning on still being in your home in 4, 6, 8, 11 years?  If not, do you have strong certainty you will be selling the home?

Do you have the ability to make large contributions to principle to mitigate the impact of future higher rates/payments when the loan converts to adjustable?

Are you guaranteed a higher income in the future that will mitigate the impact of future higher rates/payments when the loan converts?

If you are refinancing and considering refinancing into an ARM, what will you do with the monthly payment savings?  Use it for principle reduction?

The safe, fiscally conservative mortgage that almost all of our clients prefer and fund is a 30 year fixed rate mortgage.  However, for those who are very good money managers and have a well thought out plan a 3/1, 5/1 or other hybrid ARM can be a good option.

Have a question for me?  Ask me!

If you or someone you know is planning on taking advantage of the Homebuyers Tax Credit then you better get on it.  April 30^th is fast approaching.

Working backwards this week there was plenty of economic news to push the Mortgage Back Securities market higher (higher prices mean lower rates). By about 5:35 this morning (Pacific) all that pushing fell away in seconds as the unemployment figures for February were released.  Non-farm payrolls dropped 36,000 employees, much lower than the 68,000 the markets expected to be lost.  Since the markets had priced in 68,000 job losses, “only” losing 36,000 jobs signaled good news which caused a huge sell off in MBS.  Prices dumped immediately. Since then (now about 9:30 a.m.) the market has mounted several rallies to get back to even and it may happen by the end of the day.

Why the expectations so high (low)?  I don’t know if expecting more job losses sets a high expiation because of a higher number or a low expectation because of what the number means.  Either way, the expectation was set at 68,000 mainly due to the unprecedented announcement on Tuesday by White House Economic Advisor Larry Summers that the jobs number would be skewed by the bad weather.  He was setting up the markets for a very bad unemployment number, something no one can recall any Administration officials every doing before.  The markets reacted accordingly.  Now that the number is better than expected, a lot better, they are reacting accordingly.

Fueling the run up in MBS prices early in the weak was weak inflation data.  For the month of January inflation was flat and the year-over-year increase was 1.4%.  These figures on top of several Fed officials talking about “extended” low interest rates gave a boost to bonds and mortgages.

The biggest news of the past 7 days was a press release late Friday afternoon.  If anyone ever sends a press release out after noon Eastern time on Friday then you know they want to sneak it by.  In this case it was Fannie Mae announcing a $76 billion loss for 2009.  Remember that in 2008 the federal government took over Fannie Mae, so you and I now own it.  Also recall that on Christmas Eve, hiding behind the holiday and the announcement of the Senate passing Harry Reid’s version of health care reform, the Treasury announced it was lifting the cap on Fannie and Freddie losses it would back to infinity---no limit on losses—for three years and then limiting losses to $400 billion per year there after.

What’s the strategy?  As I have been writing, the Federal Reserve has about $50 billion left in its $1.2 Trillion mortgage purchase program that will end March 31^st.  Their exit leaves a big hole.  But that hole gets filled if Fannie and Freddie can buy back their own securities when they hit market.  So they will need some cash for that.  Another part of the unlimited loss coverage strategy, as I see it, is to remove obstacles to loan modification and foreclosure avoidance programs.  Banks are very resistant to cramming down principal balances, payment forbearance and other programs being pushed by the Administration to help and support those in trouble on their mortgages.  A big part of the resistance is because while pressuring banks to assist homeowners by taking on losses through one office of the Administration, another office is scrutinizing banks and has an itchy trigger finger to take them over if their losses are growing and their balance sheets are out of wack.  Having Fannie and Freddie spend unlimited amounts of funds from the Treasury allows them to purchase troubled mortgages from the banks.

Please remember one thing.  There is no such thing as “government money.”  The Treasury is covering the Fannie and Freddie losses with our money.  Your taxes are “government money.”  The more losses covered by the Treasury the more in debt you and I are.

This week in rates dropped into Thursday and today we have seen the gains of the week pretty much wiped out.  Of interest, FHA has had no Friday to Friday change in eight weeks.

Rates for Friday March 5, 2010:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.75%                              No Change

30 year conforming-jumbo 5.00%                     No Change

30 year FHA    4.75%                                      No Change

30 year FHA jumbo 4.875%                            No Change

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Some perspective on the earthquakes in Haiti and Chile.  The Richter Scale used to measure earthquakes is logarithmic, meaning the difference between 6.1 and 6.2 is greater than the difference between 6.0 and 6.1 in terms of magnitude of effect.  Still with me?

The 1994 Northridge earthquake was measured at 6.7 on the Richter Scale.  That quake was only about half the force, or seismic-energy yield, of the 7.0 quake in Haiti in January, which was the equivalent of about 2,000 Hiroshima atom bombs exploding at one time.  The quake last weekend in Chile was 8.8 on the Richter Scale, or 500 times stronger than Haiti’s, about 1,000 times stronger than the Northridge quake.

Today Chile had an aftershock that was almost the equivalent of the Northridge quake, rattling the area with a 6.6 shock.

Give me the tornados of Oklahoma over the earthquakes, at least you get warnings they are coming!

I am around most of the weekend if you or your clients need any mortgage questions answered or numbers run.

Have a great weekend, let me know how I can be of service to you,

Dennis